Ex FDIC Chair Advises Fed over Cryptocurrencies

In a new article the former chair of the U.S. government’s deposit insurance corporation advised the fed to launch its own crypto. In her article the popular finance writer, Sheila Bair, asked the Federal Reserve Bank to explore the possibilities of issuing a centrally owned digital currency.

She wrote, “If it does not stay ahead of this technology, not only could banking be disrupted — but the Fed itself could also be at risk.”

A CBDC, Central Bank’s Digital Currency will be better than current virtual coins as it won’t be much volatile due to its control and management by a central authority. She further noted that centralised virtual currencies would be “much more effective tools for conducting monetary policy to address economic cycles.”

As of now, legislation allows the government authorities to trigger and restore economic activities in situation of recession and boom. The action is taken through the sales of government-sponsored securities towards domestic banks.

But, the confusion arises on the ownership of the FedCoin as what happens when the whole control shifts to consumers? In that case changes in interest rates, which encourage savings and spending, would be directly met by users. Eventually it will swipe out the importance of policy changes from domestic banks.

On the other hand, Bair, disregards the perceived benefits promised for centralised digital coins due to credit availability. She claimed that people who put their investment in the form of CBDC would be in a dangerous situation as a downshift in coin’s value will eliminate all their savings.

Bair’s counters in favour of cyber coins come at a time when government officials around the world are looking forward to tap in the benefits of the new found technology. They are potentially looking for ways to determine the nature of a crypto coin under a central authority.

Meanwhile, Fabio Panetta, deputy governor of the Bank of Italy claimed that Central Bank’s are not ready to launch a digital currency. At SUERF and BAFFI CAREFIN Centre Conference organised at Bocconi University he became another expert to talk on the matter of the relationship between central banks and digital currencies.

In his speech he noted that CBDC would act as a liability of the central bank backed by its assets. Initially it would be backed by the credibility of the premium financial platform and eventually by the rule of law. He continued, “Crypto-assets, on the other hand, are a liability belonging to nobody: there is no asset that backs them up and no clear governance structure that can guarantee trust… the value of a CBDC would not suffer from the excessive volatility that affects crypto-assets.”

His logic suggests that CBDCs would ultimately suffer from high volatility triggered by government altercation in monetary policy. This is the main down point when talked about the negatives of current decentralised crypto assets.

As of now, CBDCs look like a farfetched dream and a desperate measure taken by the government. Till then Fed would like to tame and manage the crypto space on a daily basis.

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